THE CONSEQUENCES OF MR KEYNES.pdf - Institute of Economic ...

the General Theory he has freed himself and his policies of any
such limitation'. 1
None of this, however, constituted a very adequate or detailed
specification ofa Keynesian monetary-fiscal constitution.
This latter task was taken up not by Keynes himself but,
rather, by his disciples—members of the 'Cambridge Circus'
(such as Meade) who had worked over the drafts of the
General Theory with him, and other converts to Keynesian
analysis, in the following years. The writings of these disciples
show how the Keynesian monetary-fiscal constitution was
supposed to work in Keynesian theory.
(i) Meade
In his Economic Analysis and Policy, published soon after the
General Theory, James Meade (Nobel Economics Prize Winner,
1977) provided a detailed specification ofa Keynesian policy
regime. 2 The government, he proposed, should act to stabilise
the level of output and employment by a policy of budget
balance over the trade cycle—'a government should budget for
a large surplus in good times and for a small surplus or a deficit
in bad times' (p. 44)—reinforced by contra-cyclical variations
in monetary policy and interest rates, and in the volume of
consumer 'credits' issued as part of an unemployment compensation
scheme. These
'foregoing proposals must be sharply distinguished from an
attempt to finance an ordinary budget deficit by inflationary
measures. For if a government finances a permanent budget
deficit by printing more paper money this must lead to a progressive
and inflationary rise in prices', (p. 54)
Professor Meade also argued that there was a 'standard'
rate of unemployment in the economy, which was determined
by the real forces of the economic system, such as the size of
search and information costs and other factors. No attempt
should be made by government to reduce unemployment below
this 'standard' level by fiscal/monetary policy. The 'standard'
rate could only be reduced if policies designed to 'improve the
organisation of the labour market' were employed (p. 77).
Trade union action would raise the standard rate, if they pushed
1 H. Dalton, Principles of Public Finance, Routledge and Kegan Paul, 1954, p. 221,
fn. 1.
2 J. E. Meade, Economic Analysis and Policy, Oxford University Press, 2nd Edn.,
1938.
[52]